Airlines hit by African foreign currency crunch

Airlines hit by African foreign currency crunch

In October 2014, Emirates airline president Tim Clark revealed that the carrier would expand its coverage in Africa by adding 10 new routes by 2025, while boosting its jet fleet by 24 aircraft.

The airline, which is owned by the UAE state-owned company Investment Corporation of Dubai (ICD), was in a buoyant mood at the time having recently overtaken Air France as the biggest non-African airline flying into Africa, according to aviation data firm Innovata.

Two years later the Dubai-based airline had become the latest international airline to suspend routes into African countries that had been hit hardest by the fall in oil and commodity prices, including Nigeria. Emirates had suspended flights between Dubai and Nigeria’s capital Abuja and was in the process of assessing the viability of other routes in the region.

Clark blamed the move on the challenging economic environment across the continent. The decision came after US-based United Airlines and Madrid-based Iberia completely withdrew their flights to Nigeria earlier in the year due mainly to the issue of withheld payments. Meanwhile, British Airways also stated that it was evaluating its routes to Nigeria.

Impact of depreciation

International airlines primarily made the decision because some African governments were withholding ticket revenues to boost foreign currency reserves after the oil and commodity price collapse, according to Raphael Kuuchi, vice president for Africa at the International Air Transport Association (IATA).

“The reason for the scaling back or pulling out of the market is because of the impact of the depreciation of local currencies and the drop in oil and commodity prices in those countries,” Kuuchi says. “So, in Nigeria, for example, you are forced to sell in the local currency, but, unfortunately, foreign currency is not readily available for you to exchange your money and take it out of the country.”

According to the Central Bank of Nigeria, the country’s foreign currency reserves shrank from around $64.2bn in 2008 to $23bn in November 2016, following the fall in global oil prices. The demand for hard currency currently outstrips supply, leaving most industries, including airlines, unable to remit revenues to their native countries.

Without the ability to purchase foreign currency, the airlines’ ticket sales have been held in the local currency, which in most cases is untradeable on the foreign exchange markets.

The issue in Nigeria, therefore, was compounded in June when the country’s Central Bank partially floated the naira, leaving its value to be determined by the market. The value of the currency subsequently dropped by around 30%, in turn slashing the value of the airlines’ ticket revenues.

As of June this year, IATA reported that Nigeria owed $591m, which is the highest figure of withheld revenues in Africa. But Nigeria is not the only African country that has been forced to withhold airline funds to shore up foreign currency reserves.

Sudan, Egypt and Angola owed international airlines $360m, $291m and $237m, respectively. Venezuela had the highest amount of withheld funds, standing at $3.8bn. Progress has been made by some of the African countries in releasing the airline funds, with Nigeria releasing 58% of the money owed in the June–September period. However, airline revenues worth $5bn are still being withheld across the globe.

Industry critical to growth

The countries that are blocking the withdrawal of foreign currency should view the aviation industry as one of the critical sectors of their economies, and should, therefore, prioritise the industry when it comes to accessing foreign currency, according to Kuuchi. IATA has tried to make governments understand that aviation is an economic enabler of their countries, he says. “So if they stifle the continuous operations of airlines into their markets, they are likely to worsen their economic plight rather than improve it.”

Prioritising making foreign exchange resources available to the aviation industry makes sense especially for landlocked countries that rely on air travel to import or export goods and investors, Kuuchi adds. Unlike international airlines that have better access to foreign currency from their other global operations, African airlines have a precarious future operating in countries that are withholding funds.

While international airlines have been cutting flights to Africa, airlines from the continent have been unable to fill the void because of the difficult market conditions. During the 48th annual general assembly in Victoria Falls, Zimbabwe, the African Airlines Association (AFRAA) revealed that African airlines made losses amounting to between $700 and $800m in 2015. AFRAA’s Secretary General Elijah Chingosho blamed high fuel and air ticket taxes, and airport charges for the substantial losses.

The issue of airlines being unable to repatriate foreign currency has also had a significant effect on the profitability of homegrown airlines, according to Kuuchi. “For all airlines, the bulk of their expenses is in foreign currency. For instance, if you need to maintain your aircraft then you need foreign currency because you don’t maintain it locally, you have to fly it somewhere to get it maintained,” he says.

“And the situation is made worse because a lot of these countries are going through economic difficulties and their currencies are fluctuating, meaning the value of the ticket sales is hostage to this,” IATA’s Kuuchi adds. This view was recently echoed by South African Airways (SAA), which reported at the beginning of December that the devaluation of the naira had eroded the value of its funds trapped in Nigeria by 40%.

The airline did not reveal the value of the money being held. Despite the issue facing SAA in Nigeria, the airline confirmed that it would maintain its Lagos and Abuja operations.

However, Kenya Airways, which reported a loss of KSh26.2bn ($256m) for 2015–16, cancelled its Nairobi–Abuja flights in December mainly to falling passenger numbers. The East African airline will, however, continue to operate its daily flight from Lagos.

Outlook rosy

Despite the reduction in international airlines operating in Africa, air passenger numbers across the continent are predicted to increase by 5.1% to 303m passengers over the next 19 years according to IATA. The top 10 fastest-growing markets in Africa will be Sierra Leone, Guinea, Central African Republic, Benin, Mali, Rwanda, Togo, Uganda, Zambia and Madagascar.

Globally, air passenger numbers will double from 3.8bn people in 2016 to 7.2bn people in 2035, IATA reported. Africa’s most successful carrier, Ethiopian Airlines, is investing to tap into this growth.

“The outlook for Africa is very positive,” Kuuchi says. “All we are concerned about is for African governments to open up the African market to make travel easier, this will encourage competition and with competition, fares will come down and many more passengers will be able to travel.”

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